The Organisation for Economic Co-operation and Development (OECD) has issued a warning to UK Chancellor Rachel Reeves, cautioning that Britain may struggle to meet its fiscal rules following a downgrade in economic growth projections. According to the OECD’s latest economic outlook, the UK’s GDP growth forecast has been revised to just 1.3% for 2025 and 1% for 2026, reflecting a weaker outlook than previously expected. Contributing factors include persistent high interest rates, diminished business confidence, and ongoing global trade uncertainties. This revised outlook significantly reduces the headroom the UK government has under its own fiscal rules, leaving a buffer of just £10 billion, raising fears that current spending plans could lead to deficits exceeding legal limits.
In response to these concerns, the OECD has advised the government to adopt a more disciplined fiscal strategy to avoid breaching borrowing targets. The organization suggested a combination of targeted spending restraint, reform of local property taxes, and the closure of various tax loopholes. It also called for an urgent re-evaluation of council tax bands, which have not been adjusted for decades and are considered outdated. The OECD emphasized that these measures could help generate revenue without imposing broad, unpopular tax increases, especially during a time of economic fragility.
The OECD further warned that the UK’s public debt remains a major vulnerability. Debt levels are projected to rise from 101.3% of GDP in 2024 to over 104% in 2026, driven in part by large interest payments. This trend poses a long-term threat to fiscal sustainability. Although inflation is forecast to moderate gradually, with a return to 2.3% by 2026, high borrowing costs and fragile growth continue to weigh on the economic outlook. A potential easing of interest rates by the Bank of England could provide some relief, but only if inflation subsides as expected.
Chancellor Rachel Reeves, who has pledged to pursue a fiscally responsible approach under Labour’s “Plan for Change,” now faces mounting pressure as she prepares the autumn budget. With limited room for error, her team must balance voter expectations with the need for budgetary discipline. The OECD underscored the importance of maintaining investments that drive productivity, such as infrastructure and skills development, while also rebuilding fiscal buffers to prepare for future shocks.
As ministers negotiate spending settlements with Whitehall departments, the Chancellor’s decisions over the coming months will be critical. The UK’s economic credibility and stability may hinge on Reeves’ ability to navigate this tight fiscal environment without derailing public services or investor confidence.
